Tue Sep 08, 2009 at 00:08:36 AM CDT

The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed our Jobs, Pensions, and Prosperity, by Les Leopold, has the best explanations I have found yet of Collaterized Debt Obligations, Credit default Swaps, and the other financial weapons of mass destruction that have detonated on our economy the last few years.

But Mr. Leopold goes beyond clearly-written descriptions and tells us the story of how these bizarre derivatives originated, thrived, and ultimately dominated the world's financial system. He also, I think, makes a case for how income inequality, which we've been discussing recently, led to the financial meltdown.

The book opens with a specific episode from the 2007-2008 financial fiasco to illustrate how otherwise responsible elected officials and public trustees could get sucked in over their heads - "The Hooking of Whitefish Bay". Reading, I kept think of Jefferson County's woes, for the stories are similar - promised high returns through mysterious investments that were supposedly AAA-dead-safe, followed by fee after fee after fee to the banks and Wall street.

Like the best storytellers, he ties the particular local disaster for Whitefish Bay to the larger financial catastrophe playing out across the nation, but he doesn't just leave it as some kind of perfect storm that no one could have foreseen. Oh no, this was a self-inflicted wound, and Mr. Leopold steps the reader through the economic and political history leading up to this mess.

Given all the policy and tax changes that our elected leaders elected to make, as well as the changes in the world's economy, this was going to happen. As a co-worker said, "The amazing thing is not that we shoot ourselves in the foot every so often, it's how quickly we reload!!"

The events of 2007-2008 resulting in the collapse of Bear Sterns and Lehman Brothers and the spectacle of AIG hovering in mid-air - just off the edge of the cliff, like Wil. E. Coyote before he looks down - basically amounted to all the gamblers at every table in the casino getting "called" at the same time, when they had all borrowed each other's future winnings.

But without the cool objectivity or icy sang-froid.

For that to happen, there were three ingredients required: a casino, gamblers, and lots of other people's money to gamble with. Les Leopold explains nicely how each of these elements came to be, and as a bonus, provides a history of bubbles, usury, and financial innovations (starting with the invention of the pawnshop by a Chinese monastery in AD 662). The casino was built on the debris of scrapped regulation (the Glass-Steagall act died in 1999) from bricks of unregulated finance. Our lawmakers had to especially strain to make sure that credit default swaps were NOT insurance and collaterized debt obligations were NOT anything like mortgages, but they proved up to the challenge, so none of this crap was regulated or even looked at. The gamblers, well, they were just waiting at the door. The merger mania of the 1980s and 1990s bred a new tribe on Wall Street that understood that there was no need for securities to be related to anything concrete, such as actual company shares or actual debt. Finally, the supply of other people's money - the critical ingredient without which neither the casino nor the gamblers would even exist - was made available slowly, starting in the 1970s.

That's right - the pile of money demanding quick returns at the roulette wheel began growing back when the curve of rising productivity and the curve of stagnant average wages parted company. For years, as productivity (output per worker-hour) rose - which it did - real wages rose with it. But after 1973 or so, real wages (and then salaries) stayed put. So where did the money go? Because that's what we're talking about here - productivity increases means more output for the same cost, or the same output for lower cost - higher profits and more money any way you slice it. Well, Les Leopold explains pretty clearly that the money started flowing to the upper crust, through interest payments on corporate bonds and other commercial paper that boiled up as corporations were leveraged, bought and sold through the 80s and 90s.
In fact, what I took away from reading the book is that so much money flowed to so few people that by the mid 90s, they had run out of real investments. Because real investments take time to mature and real products take time to get to market - but Capital Must Have Returns, Right Now Dammit.

So, after all the potential shopping malls, and resort developments, and planned towns, and cockamamie websites with sock monkeys, and snake-oil software companies, and the next great rocket ship, are already taken - what's left for the "investor"? Just pure gambling - on swaps of whether or not some part of some CDO will default, or whether some stock index will go up or down. Not actual stock, mind you, but indexes and derivatives that have the same relationship to real securities as fantasy football teams do to the NFL. (By the way, Les Leopold came up with that metaphor, not me. Credit where credit's due, and all that) Trouble is, fantasy finance can do actual harm that fantasy football cannot. That's where the other people's money came in. Taxpaying other people.

The reason is that these fantasy finance instruments got marketed as securities with high ratings. And then cities, and counties, and pension funds could legally invest in them - and in some cases were obligated to do so in order to acheive the highest returns. That is how Whitefish Bay, Wisconsin, and Jefferson County, Alabama, were led to their doom.

They sold the taxpayer's cow for the magic beans.

PLEASE go read the linked excerpts. This is too important to blow off. And buy or borrow the book - it's too good to miss.

is basically saying the same thing. That the early part of the Century, Capitalism 1.0, was characterized by too few goods (primitive production capacity) whereas the latter half, Capitalism 2.0, is characterized by too much capital and not enough space and environment to go around.

A lie gets halfway around the world before the truth has a chance to get its pants on. -Churchill

as has Leopold with his book! I will get a copy ASAP, and will be a smarter man for it. Thanks, Herding.

Only after the last tree has been cut down. Only after the last fish has been caught. Only after the last river has been poisoned. Only then will you realize that money cannot be eaten. Cree Nation Tribal Prophecy